Societe Generale Still Treading Water And Going Nowhere Fast

French banking giant Societe Generale (OTCPK:SCGLY) continues to post the sort of performance that puts the stock firmly in the “cheap for a reason” camp. Although second quarter results were better than expected pretty much across the board, the core results weren’t as strong and the company is falling short of its own modest targets. Although the stock sports a high yield, low multiples, and very low expectations, it’s tough to see what will break this company out of its malaise short of another turnover in management or a more serious merger approach from a company like UniCredit (OTCPK:UNCRY).

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Societe Generale Still Treading Water And Going Nowhere Fast

Societe Generale's Ongoing Stumbles And Struggles Explain The Value Gap

Savvy, attentive investors can find bargains in the market, but it is usually a good idea to stop and ask why a given stock appears undervalued, as not all cheap-looking stocks are bargains. France's Societe Generale (OTCPK:SCGLY) is a case in point. A turnaround story that just won't turn around, Societe Generale continues to produce "it's always something quarters" that leave the market and investors disappointed.

At this point, it is difficult to come up with compelling reasons to own Societe Generale beyond its low apparent valuation and the prospect that these ongoing struggles might prompt a more dramatic rethinking of the company's strategy. That said, the company's prominent position in France likely limits how much activist investors can accomplish, and likewise any M&A activity may be challenging if Societe Generale isn't in the driver's seat. While these shares do appear to have double-digit upside, the company has really done nothing to engender trust in its ability to meet even modest long-term growth expectations.

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Societe Generale's Ongoing Stumbles And Struggles Explain The Value Gap

Geared To Growth, Societe Generale's New Plan Doesn't Offer Much That's New

Between disappointing third quarter earnings and a new multiyear strategic plan that I believe many investors found underwhelming, Societe Generale (OTCPK:SCGLY) (GLE.FR) has seen its shares pressured once again. Although there have been some signs of life in this French bank’s international operations, the domestic operations have been lackluster, as have the capital markets businesses. Still, this is a bank that is structurally geared toward growth, and if economic growth does in fact pick up across Europe, Societe Generale may yet hit its long-awaited 10%-plus ROE target and unlock meaningful value.

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Geared To Growth, Societe Generale's New Plan Doesn't Offer Much That's New

Seeking Alpha: UniCredit Needs Help To Be Better

Regular readers of my work will know that I have a certain affection for tangled, messed up, trainwreck-y stories, as I often find a lot of value in stories that are too ugly, too complicated, or too time-consuming to get a lot of attention from institutional investors.

I think that's an apt lead-in for UniCredit SpA (OTCPK:UNCFF), as this large pan-European bank continues to work through a lot of the lingering damage of the European banking sector meltdown. A year ago I didn't see all that much surplus value in the shares and they have only appreciated about 6% since then (the local shares; because of currency the ADRs are down closer to 20%).

Unfortunately, I still don't see a lot of value unless and until the bank can drive its ROE above 12% again - and despite its high-quality operations across Central and Eastern Europe, that could take quite a bit longer to achieve.

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UniCredit Needs Help To Be Better

Seeking Alpha: Societe Generale Continues To Grind Forward

The last three months haven't been the easiest stretch for Western European banks, and Societe Generale (OTCPK:SCGLY) is down around 6% over that stretch. BNP Paribas (OTCQX:BNPQY) has been even weaker (down more than 10%), while Credit Agricole (OTCPK:CRARY), UniCredit (OTCPK:UNCFF), Credit Suisse (CS) and many others have done better but are still down over that short stretch.

Not all that much has changed, but banks have moved to a different part of the recovery phase. First quarter results were pretty "meh," including those at Societe Generale. The stories have shifted from significant cost of equity and balance sheet improvements to slower, grind-it-out return on equity improvements. I continue to believe that Societe Generale is undervalued and one of the more attractively-priced large bank stories today, but it's going to take time and the Street still isn't convinced that Societe Generale is going to produce the double-digit ROE on schedule and/or improve its lagging Russian operations.

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Societe Generale Continues To Grind Forward

Seeking Alpha: UniCredit's Valuation Seems Fair Given The Potential And The Risks

Like other European banks badly damaged in the credit crisis and the deep recession that followed, UniCredit SpA (OTCPK:UNCFF) has faced a difficult road back to normalcy. The company has had to turn to highly dilutive financing to stay in business and conditions in the company's core Italian market have not really improved all that quickly. Even so, the company's shares have followed a similar trajectory to damaged-but-not-dead European banks like Societe Generale (OTCPK:SCGLY), Santander (SAN), and Intesa Sanpaolo (OTCPK:ISNPY), with the stock up about 47% over the past year and over 130% over the past two years.

UniCredit is a challenging case from a valuation perspective. The company's sizable exposure to Central and Eastern Europe (or CEE), which includes Russia and Turkey, is a major potential growth driver, as would be an economic recovery in Italy. Management has laid out ambitious goals for 2018, but I believe they are achievable. Unfortunately, the shares just don't look all that cheap today and Societe Generale may well still be the better option.

Investors considering these shares should note that the U.S. ADR has limited and erratic liquidity. Investing in the Milan-listed shares (RIC: CRDI.MI, BBG: UCG.IM) will offer more consistent liquidity.

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UniCredit's Valuation Seems Fair Given The Potential And The Risks

A Little More on Unicredit

The more I look at this Unicredit situation, the less I like it.

It looks like the proximate cause of former CEO Profumo's departure (which very much reads like a "jump ... or we push" situation) was two Libyan entities taking a combined 7.4% stake in the bank. Nevermind the fact that Unicredit needed to raise capital and large stable investors are typically a good thing, apparently this rankled some on the board and caused problems.

Truth be told, I don't know exactly what the problem is. Libya is not exactly fully rehabilitated in the eyes of the West and its not as though European institutions are overjoyed to see Arab/African investors buying their assets. And maybe that's part of what lies underneath the controversy - Libya and Italy certainly have a "history" together, and it probably aggravates the hell out of some Italians to see Libya buying into Italian assets from a position of relative power. With rumors that certain Italian politicians were displeased with this arrangement and making that known to the board, who knows exactly what role this had.

Whatever the case may be, the fact still remains that Profumo guided Unicredit from being just another Italian bank to being a major player in Europe - the second-largest bank in Italy, the third-largest in Germany, and the largest in both Austria and CEE. Even granting that the stock performed better in the first half of his tenure than the second, Profumo should still be appreciated by long-term shareholders.

And now it's time to see where the bank goes from here. There is definitely some need for restructuring at Unicredit, and perhaps that was also part of the CEO's departure - whether he wanted to go slower than the board or faster. So if Unicredit is about to change itself in some pretty significant ways, maybe it is better to do so with new management at the helm.

The vacuum at the top is certainly a big risk factor, as nobody can really say what the near-term direction for the bank is going to be (at least not until the new CEO lays it out). Likewise, it is fair to wonder just how this board operates and what sort of "non-operating influences" get to be played out behind the closed doors of the boardroom.

Still ... this bank was a quality company before the crisis and even if Italy sometimes seems like a perpetual economic and political head-case, it seems likely to be a good candidate for a strong recovery. I have enough European banking exposure for now (though Santander (NYSE: STD, Danske, and a few Swedish banks are enticing...), and would rather add in places like South America (Itau), South Africa (Standard), and Asia (DBS Group), but Unicredit seems pretty dang cheap right now.  Assuming that the board isn't daft enough to screw up over a decade of progress, this could be a good opportunity to buy a dip and get a quality pan-European bank.